The structural divergence within China's economy is becoming increasingly prominent, extending from the industrial level to multiple dimensions including regional development, corporate performance, and household income, presenting a key challenge to be addressed during the economic transformation process.
A recent analysis and forecast report on China's macroeconomy, released by the China Macroeconomic Forum (CMF) at Renmin University of China, indicates that GDP growth for the first half of the year is estimated at 4.5% to 4.7%. Full-year economic growth is more likely to be in the middle-to-lower part of the target range, leaving ample room for adjustment during the economic transition.
The report points out that China's economy faces a series of external risks and internal challenges. The "K-shaped divergence" brings both the benefits of transformation and upgrading, as well as widespread economic pain and weakened income expectations. In this process, the government must play a role in providing a safety net and coordination, carefully navigating a balanced approach until the divergence eases and a new, higher-level equilibrium is reached.
Multiple experts suggest that in the short term, efforts to stabilize growth should be intensified to ensure the economy operates within a reasonable range. In the medium term, comprehensive measures should be implemented to allow the growth speed and scale of emerging industries to quickly compensate for the slowdown in traditional industries, thereby shouldering the main responsibility for China's economic development. In the long run, it is even more crucial to establish a mechanism for sharing economic development gains. This involves top-level design and systematic institutional arrangements in areas such as reforming national income distribution, restructuring fiscal and tax incentives, and wage growth mechanisms. The goal is to help groups and regions on the downward side of the "K-shaped divergence" navigate the painful transition period and propel China's economy toward higher-quality, more efficient, fairer, and more sustainable development.
Structural Divergence Becomes Prominent
As artificial intelligence rapidly empowers various industries, the "K-shaped divergence" characteristic of China's economy has become prominent, ranging from strong supply versus weak demand, to the split between new quality productive forces and traditional industries, and further to divergences among different income groups and cities.
Liu Qing, Executive Dean of the National Academy of Development and Strategy at Renmin University of China, stated that China's high-tech industries, particularly the AI industry chain and equipment manufacturing, will continue to see development and export opportunities. On the other hand, the downturn in traditional industry investment is driven by market pressure to clear excess capacity, insufficient motivation for new investment, and constrained local government finances for protecting related industries. This decline is expected to be more intense and prolonged than in the past.
Lu Ting, Chief China Economist at Nomura, noted that China's economic "K-shaped divergence" is also evident among people with different incomes and between cities, with the rise of AI further widening this gap. He analyzed that AI is further replacing ordinary white-collar and flexible employment positions, concentrating wealth towards capital and high-skilled individuals. Unlike traditional industries that gradually spread benefits, AI tends to see top-tier cities replacing jobs in lower-tier cities and extracting profits, thereby widening regional disparities.
The report indicates that while "K-shaped divergence" is an objective reality, it only describes one aspect or surface phenomenon of China's macroeconomy. It fails to capture the side of the economy that "holds the bottom line," the aspect of "creative destruction" and "optimization and adjustment," and the future-oriented prospects of "opening new ground" and moving towards innovation and intelligence within the economic divergence. Comprehensively speaking, China's macroeconomy overall presents a posture of "connecting the past with the future," which includes a triple logic of "holding the bottom line, optimizing and adjusting, and opening new ground."
The report further points out that holding the bottom line means safeguarding economic growth rates, people's livelihood security, green development, and security. Optimizing and adjusting involves targeted adjustments, marginal optimization, and creative destruction of the current economic structures across various aspects, promoting stable and sound economic operation under new goals and stages. Opening new ground means that as a new wave of technological revolution and industrial upgrading approaches, based on current reform and development achievements, there should be proactive adaptation to the new requirements brought by new technologies and business models, and innovative groundwork should be laid for future development.
Research from Tianfeng Securities shows that "K-shaped divergence" is a phased characteristic during the economic transition period. Its convergence depends on whether prosperity from the upper arm can be transmitted to the lower arm, whether policies can effectively support the lower arm, and the pace of the shift between old and new growth drivers. In the short term, structural divergence is likely to persist, with the July Politburo meeting being an important window for observing policy direction.
Vigorously Developing Emerging Industries
Currently, the global economy stands at the historical intersection of a new round of technological revolution and industrial transformation. Sectors like artificial intelligence, commercial aerospace, humanoid robots, and quantum information are maintaining rapid growth, becoming important forces driving the economy. However, the proportion of these industries within the overall national economy remains relatively low, and they have not yet fully taken on the primary role.
The State Council executive meeting held on June 5 formally characterized future industries as an "important engine" for promoting high-quality development. Wu Zewei, a special researcher at Suzhou Bank, believes this is not merely an upgrade in policy rhetoric but a precise "prescription" from decision-makers at a critical juncture of global technological revolution and industrial transformation, targeting the structural contradictions in China's economy.
Wu Zewei stated that the primary task to resolve the "K-shaped divergence" is to rapidly enable the growth speed and scale of emerging industries to sufficiently compensate for the slowdown in traditional industries, truly shouldering the main responsibility for China's economic development. The reason why developing future industries has become a fundamental solution to this structural contradiction lies in its ability to exert force simultaneously from two dimensions: aggregate replacement and structural integration, achieving a smooth transition between old and new growth drivers rather than a harsh cut-off.
Luo Zhiheng, Chief Economist at Yuekai Securities, also believes that China is in a critical period of transitioning between old and new growth drivers. There is an urgent need to develop new quality productive forces to fill the growth gap formed by the weakening of traditional drivers like real estate and infrastructure.
Wang Guanhua, a spokesperson for the National Bureau of Statistics, recently pointed out that the cultivation and expansion of these new growth drivers is not an overnight or immediate process, but one that requires persistent effort and gradual accumulation. It is the result of combined drivers from policy guidance, market demand, and technological innovation. This deep-seated change is reshaping China's development momentum, continuously enhancing the resilience and staying power of high-quality development.
The State Council executive meeting systematically established a development framework for future industries from four dimensions: consolidating the technological foundation, fostering a favorable ecosystem, strengthening policy support, and building strong risk defenses. It particularly emphasized the need to continuously increase investment in basic research, systematically plan for original and disruptive technological breakthroughs, and grasp the fundamentals of future industry development.
The State Council executive meeting proposed fully leveraging the guiding role of government investment funds, improving mechanisms for increasing investment and sharing risks, and effectively alleviating the common funding shortages in the early development stages of future industries. It also explicitly required guiding scientific and rational layout planning, improving regulatory governance, and preventing herd behavior and blind follow-the-trend actions. This arrangement reflects the foresight and scientific nature of policy formulation, helping to avoid repeating the mistakes of overcapacity seen in some emerging industries in the past and ensuring the healthy and orderly development of future industries.
Wu Zewei stated that looking ahead, as the various deployments from the State Council executive meeting are gradually implemented, China's future industries will enter a golden period of accelerated development. They will not only become a new engine for economic growth but will also, through deep integration with traditional industries, fundamentally solve the "K-shaped divergence" problem, propelling China's economy towards higher-quality and more sustainable development.
Building a Long-term Sharing Mechanism
In the long run, the key to resolving structural divergence lies in ensuring that the fruits of economic growth benefit the entire population, establishing a mechanism for sharing economic development gains. Currently, China's growth primarily comes from capital-intensive and technology-intensive industries. These industries have a far weaker effect on employment generation compared to the labor-intensive industries of the past. In this context, building a long-term sharing mechanism becomes extremely crucial; otherwise, the economy will become increasingly imbalanced and growth unsustainable.
"While supporting the development of new quality productive forces, policies need to pay more attention to how to help groups and regions on the 'downward' side navigate the painful transition period through social security, skills training, and accelerating the construction of a new-type income distribution mechanism, preventing divergence from evolving into a rupture," said Liu Qing.
Luo Zhiheng also believes that countermeasures should not be limited to traditional counter-cyclical adjustments. There is a greater need for top-level design and systematic institutional arrangements in areas such as reforming national income distribution, restructuring fiscal and tax incentives, and wage growth mechanisms. While the AI technological revolution greatly enhances the efficiency of "making the cake," if the mechanism for "dividing the cake" is not optimized simultaneously, the contradiction between supply and demand may evolve from a cyclical, temporary issue into a long-term, structural dilemma.
Liu Shijin, former Deputy Director of the Development Research Center of the State Council, proposed three suggestions at the forum. First, adjust the savings-consumption structure by setting specific quantitative indicators, with the core being transferring approximately 20 trillion yuan in state-owned capital to replenish social security funds, leveraging dividends from state-owned and private enterprises to release household consumption. Second, advance tax system reform, focusing on optimizing personal income tax and establishing a property tax collection system to achieve reasonable regulation of income distribution, gradually reducing the Gini coefficient below 0.4. Third, shift the focus of government macro-control towards the consumption side and addressing shortcomings in people's livelihoods, focusing on filling gaps in social security, optimizing the allocation of urban and rural housing resources, and unleashing the consumption potential of new urban residents.
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